Notice2024-27220
Joint Industry Plan; Notice of Filing of Proposed Amendment To Add Paragraph (c) to Section 6 of the Plan for the Purpose of Developing and Implementing Procedures Designed To Facilitate the Listing and Trading of Standardized Options Authorizing the OLPP Sponsors To Act Jointly To Discuss Quote Mitigation Issues and Potential Solutions
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Published
November 21, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 225 (Thursday, November 21, 2024)</title>
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[Federal Register Volume 89, Number 225 (Thursday, November 21, 2024)]
[Notices]
[Pages 92238-92241]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-27220]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101640; File No. 4-443]
Joint Industry Plan; Notice of Filing of Proposed Amendment To
Add Paragraph (c) to Section 6 of the Plan for the Purpose of
Developing and Implementing Procedures Designed To Facilitate the
Listing and Trading of Standardized Options Authorizing the OLPP
Sponsors To Act Jointly To Discuss Quote Mitigation Issues and
Potential Solutions
November 15, 2024.
Pursuant to Section 11A of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 608 thereunder,\2\ notice is hereby given that
on October 31, 2024, Cboe BZX Exchange, Inc., Cboe C2 Exchange, Inc.,
Cboe EDGX Exchange, Inc., and Cboe Exchange, Inc., on behalf of the
Sponsors \3\ of the Plan for the Purpose of Developing and Implementing
Procedures Designed to Facilitate the Listing and Trading of
Standardized Options Submitted Pursuant to Section 11A(a)(3)(B) of the
Securities Exchange Act of 1934 (``Options Listing Procedures Plan,''
``Plan,'' or ``OLPP''),\4\ filed with the Securities and Exchange
Commission (``Commission'') a proposed amendment to the OLPP. The
amendment proposes to add a provision to the OLPP authorizing the OLPP
Sponsors to act jointly to discuss both quote mitigation issues and
potential solutions to address any issues identified, including, but
not limited to, discussing potential new options strike listing
methodologies and rules, in order to determine whether the Sponsors
might propose one or more amendments to the Plan for Commission
approval or whether the individual Sponsors might seek to amend their
own rules.
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\1\ 15 U.S.C. 78k-1.
\2\ 17 CFR 242.608.
\3\ The Sponsors of the OLPP are: BOX Exchange LLC; Cboe BZX
Exchange, Inc.; Cboe C2 Exchange, Inc.; Cboe EDGX Exchange, Inc.;
Cboe Exchange, Inc.; MEMX LLC; Miami International Securities
Exchange LLC; MIAX Emerald, LLC; MIAX Pearl, LLC; MIAX Sapphire LLC;
Nasdaq BX, Inc.; Nasdaq GEMX, LLC; Nasdaq ISE, LLC; Nasdaq MRX, LLC;
Nasdaq PHLX LLC; The Nasdaq Stock Market LLC; NYSE American LLC;
NYSE Arca, Inc.; and The Options Clearing Corporations.
\4\ OLPP is a national market system plan approved by the
Commission pursuant to Section 11A of the Act and Rule 608
thereunder. See Securities Exchange Act Release No. 44521 (July 6,
2001), 66 FR 36809 (July 13, 2001). The full text of the OLPP is
available at <a href="https://www.theocc.com/getmedia/198bfc93-5d51-443c-9e5b-fd575a0a7d0f/options_listing_procedures_plan.pdf">https://www.theocc.com/getmedia/198bfc93-5d51-443c-9e5b-fd575a0a7d0f/options_listing_procedures_plan.pdf</a>.
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The Commission is publishing this notice to solicit comments from
interested persons on the proposed amendment. Set forth below in
Section I, which is being published substantially as filed by the
Sponsors, is the statement of the purpose and summary of the amendment,
along with information pursuant to Rule 608(a) under the Act.
I. Requirements Pursuant to Rule 608(a)
1. Text of Amendment
This [a]mendment proposes to add paragraph (c) to Section 6 of the
OLPP. The text of the proposed amendment is in Exhibit I, which is set
forth in Section II, below.
2. Purpose of Amendment
For many years, as the options industry has expanded and become
more complex, industry participants have raised so-called ``quote
mitigation''
[[Page 92239]]
concerns, including concerns about proliferation of listed options
strike prices and the resulting potential negative effects on investors
and on the market makers that are obligated to quote in all of the
listed series. Such concerns have been raised at various times in
discussions involving one or more of the OLPP Sponsors, market maker
members of the national securities exchanges who are obligated to
provide quotes in all of the listed option series, the staff of the
Securities and Exchange Commission, and the members of various industry
working groups (such as the Listed Options Market Structure Working
Group).
For example, industry participants have voiced concerns about how
to balance the need to provide investors with a sufficient number of
strikes to meet their investment purposes, while also ensuring that the
number of listed strikes does not become so large that the market
makers, who are required to quote continuously in a significant number
of existing strikes, are not unduly burdened by having to expend
significant amounts of their finite capital to continuously quote
strikes in thinly traded and illiquid series. Indeed, although
investors need to have a choice of appropriately granular strikes to
satisfy their investment needs, some industry participants also have
questioned whether the increase in the number of strikes might harm
investors, particularly in less liquid series, because investors could
become confused about the properties of the various strikes and might
be unable to close out positions in illiquid series in an effective
manner. Finally, industry participants also have questioned whether the
proliferation of strikes might harm overall market quality and widen
spreads because market makers are forced to deploy their limited
capital in a less efficient manner as a result of their obligation to
continuously quote strikes in thinly traded series.
Over the years, there have been a number of amendments to both the
OLPP and to the rules of the OLPP Sponsors that were designed to
address some of the issues summarized above. For example, in 2009, the
OLPP Sponsors proposed a ``quote mitigation strategy'' amendment to the
OLPP, with a goal of reducing the amount of quote traffic that had
resulted from the Penny Pilot Program. See Joint Industry Plan; Notice
of Filing of Amendment No. 3 to the Plan for the Purpose of Developing
and Implementing Procedures Designed To Facilitate the Listing and
Trading of Standardized Options, Release No. 34-60362, 74 FR 37266
(July 22, 2009). When proposing that amendment, the Plan Sponsors
represented that the Penny Pilot Program resulted ``in an explosion of
quote traffic'' and that the proposed ``uniform listing standards to
the range of options series exercise (or strike) prices available for
trading'' was a quote mitigation strategy designed to ``reduce the
number of options series available for trading, which will in turn
lessen the rate of increase in quote traffic.'' Id., 74 FR at 37266 and
n.4.
When it approved the 2009 amendment to the OLPP, the Commission
concluded that the amendment ``should reduce the number of options
series available for trading, and thus should reduce increases in the
options quote message traffic because market participants will not be
submitting quotes in those series.'' See Joint Industry Plan, Order
Approving Amendment No. 3 to the Plan for the Purpose of Developing and
Implementing Procedures Designed To Facilitate the Listing and Trading
of Standardized Options, Release No. 34-60531, entered on August 19,
2009, 74 FR 43173, 43174 (Aug. 26, 2009).
As another example, in 2020, Nasdaq BX, Inc. (``BX'') proposed a
rule that sought to limit ``Short Term Options Series'' intervals
between strikes which are available for quoting and trading on that
exchange. See Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of
Filing of Proposed Rule Change To Amend Options 4, Section 5, To Limit
Short Term Options Series Intervals Between Strikes Which are Available
for Quoting and Trading on BX, Release No. 34-90384, 85 FR 73113 (Nov.
9, 2020). In its filing, BX noted that its proposal ``to reduce the
number of strikes in the furthest weeklies, where there exist wider
markets and therefore lower market quality'' was an ``initial attempt
at reducing strikes and [that BX] anticipates filing additional
proposals to continue reducing strikes.'' Id., 85 FR at 73117 and n.23.
BX also noted that reducing the number of listed weekly options would
encourage market makers to deploy their capital more efficiently and
improve displayed market quality. Id. at 73119. Finally, BX represented
that (1) its proposal was a reaction to comments that it received from
industry members ``with respect to the increasing number of strikes
that are required to be quoted by market makers in the options
industry'' and (2) reducing the number of strikes would ``allow Lead
Market Makers and Market Makers to expend their capital in the options
market in a more efficient manner'' because, as the number of strikes
listed across options exchanges increases, market makers ``must expend
[more] capital to ensure that they have the appropriate infrastructure
to meet their quoting obligations on all options markets in which they
are assigned in options series.'' Id.
When approving BX's 2020 rule filing, the Commission noted that it
had received several comments expressing support for the proposed rule
change. See Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of
Filing of Amendment No. 1 and Order Granting Accelerated Approval of
Proposed Rule Change, as Modified by Amendment No. 1, To Amend
Options4, Section 5, To Limit Short Term Options Series Intervals
Between Strikes That Are Available for Quoting and Trading on BX,
Release No. 34-91125, entered February 12, 2021, 86 FR 10375, 10376
(Feb. 19, 2021). The Commission also found that:
More efficient and better calibrated strike increment rules can
have a positive impact on options markets, as it can provide
certainty, minimize confusion, and promote more efficient use of
resources among market makers that are obligated to continuously
quote such series, all while still offering customers the choice to
meet their investment needs.
Id., 86 FR at 10377. Finally, the Commission also noted that the
approved rule ``may serve as a starting point to a broader initiative
to revisit, harmonize, and update the panoply of strike listing rules
more broadly.'' Id.
Following the Commission's approval of BX's 2020 rule filing, other
exchanges, including Cboe Exchange, Inc. (``Cboe''), promulgated
similar amendments to their rules. See, e.g., Self-Regulatory
Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Amend Rule 4.5 (Series of
Option Contracts Open for Trading) in Connection With Limiting the
Number of Strikes Listed for Short Term Option Series Which Are
Available for Quoting and Trading on the Exchange, Release No. 34-
91456, 86 FR 18090 (April 1, 2021). In its filing, Cboe noted that
limiting the number of weekly strikes in which market makers are
required to quote would allow those market makers to expend their
capital in the options market in a more efficient manner, which could
improve overall market quality, while still providing market
participants with access to sufficient strike intervals to meet their
investment objectives. Id., 86 FR at 18093-94. Cboe also noted that the
removal of strikes found in clusters whose characteristics closely
resemble one another would protect the investors and the general public
by removing unnecessary choices of an options
[[Page 92240]]
series, which could result in improved market quality. Id. at 18094.
Recently, one of the OLPP Sponsors, Cboe, compiled statistics
comparing the increase in the average number of multiple listed options
series listed per day in the months of June 2020 and June 2024. Cboe
also examined the reduction in the average percentage of series traded
per day during those two months and the reduction in average percentage
of series with open interest per day. That analysis suggests that there
are still significant quote mitigation issues in the options markets.
Specifically, Cboe's analysis revealed that the average series
listed per day increased by 27% in June 2024, when compared to June
2020, with an average of 1,406,632 series listed per day in 2024 and
1,107,980 series listed per day in June 2020. Cboe's analysis also
revealed, however, that the average percentage of series that traded
per day decreased from 18% in June 2020 to 10% in June 2024 and that
the average percentage of series with open interest per day decreased
from 53% to 47% during those same comparison months. In other words, as
the average number of series listed per day continues to increase, more
series appear to be thinly traded and therefore less liquid--a dynamic
that the OLPP Sponsors believe may worsen quote quality because market
makers are required to expend their capital to quote in the expanding
number of series that are listed.
As a result of the concerns outlined above, the OLPP Sponsors
believe that the options industry would benefit from the OLPP being
amended to explicitly authorize the Sponsors to act jointly to discuss
quote mitigation issues, including reaching out to other industry
participants to solicit their views, with a goal of identifying
specific issues and potential solutions to those issues. Such an
amendment would be consistent with Rule 608(a)(3)(A) of Regulation
National Market System, which authorizes self-regulatory organizations
(like the OLPP Sponsors) to act jointly in preparing and filing any
amendment to a national market system plan. 17 CFR 242.608(a)(3)(A). In
addition, if the Sponsors determine that it is appropriate to address a
quote mitigation issue by proposing a further amendment to the OLPP,
such an amendment would be submitted to the Commission for approval
pursuant to Rule 608(b) of Regulation NMS. 17 CFR 608(b). Similarly, if
the Sponsors determine to address any identified issues with new
options strike listing methodologies and rules, they may seek to do so
through submission of rule filings pursuant to Section 19(b) of the
Exchange Act. 15 U.S.C. 78s(b).
3. Manner of Implementation of Amendment
The proposed amendment will be added to the OLPP following
Commission approval of the amendment pursuant to Rule 608(b)(1) and
(b)(2) of Regulation NMS.
4. Phases of Development and Implementation
Not applicable.
5. Impact on Competition
The Sponsors believes that the proposed amendment will impose no
burdens on competition that are not justified in light of the purposes
of the Act.
6. Written Understandings or Agreements Among Plan Members
Not applicable.
7. Approval of Proposed Amendment
Each Sponsor approved the submission of the [a]mendment and has
executed a signed copy of the [a]mendment.
8. Exhibits
I. Proposed amendments to Section 6 of the OLPP.
9. Description of Operation of Facility Contemplated by the Proposed
Amendment
Not applicable.
10. Terms and Conditions of Access
Not applicable.
11. Method of Determination and Imposition, and Amount of, Fees and
Charges
Not applicable.
12. Method and Frequency of Processor Evaluation
Not applicable.
13. Dispute Resolution
The Plan does not include provisions regarding the method by which
disputes arising in connection with the operation of the plan will be
resolved.
II. Text of the Proposed Amendment to the OLPP (Exhibit I)
Language proposed to be added to Section 6 of the OLPP as new
Section 6(c):
(c) The Plan Sponsors are authorized to act jointly to discuss both
quote mitigation issues and potential solutions to address any issues
identified, including, but not limited to, discussing potential new
options strike listing methodologies and rules, in order to determine
whether the Sponsors might propose one or more amendments to the Plan
for Commission approval or whether the individual Sponsors might seek
to amend their own rules.
III. Solicitation of Comments
The Commission seeks comment on the amendment. Interested persons
are invited to submit written data, views and arguments concerning the
foregoing, including whether the proposed amendment is necessary or
appropriate in the public interest, for the protection of investors and
the maintenance of fair and orderly markets, to remove impediments to,
and perfect the mechanisms of, a national market system, or otherwise
in furtherance of the purposes of the Act. Comments may be submitted by
any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#443631282169272b2929212a3037043721276a232b32"><span class="__cf_email__" data-cfemail="8cfef9e0e9a1efe3e1e1e9e2f8ffccffe9efa2ebe3fa">[email protected]</span></a>. Please include
file number 4-443 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submission should refer to file number 4-443. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's internet website (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. Copies of the filing also will be available for inspection and
copying at the principal offices of the Sponsors. Do not include
personal identifiable information in submissions; you should submit
only information that you wish to make available
[[Page 92241]]
publicly. We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to file number 4-443 and should be
submitted on or before December 12, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\5\
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\5\ 17 CFR 200.30-3(a)(85).
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Stephanie J. Fouse,
Assistant Secretary.
[FR Doc. 2024-27220 Filed 11-20-24; 8:45 am]
BILLING CODE 8011-01-P
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